Britain's divided economy was starkly highlighted yesterday as industry faced its biggest increase in costs for 18 years while retailers were forced to cut prices aggressively last month in the face of weakening consumer demand.

High street sales slowed in March as the credit crunch took its toll on overstretched consumers. Prices for consumer goods such as flat-screen TVs and laptop computers were cut by a record 15% compared with this time last year.

However, manufacturers saw a rapid rise in the cost of raw materials such as oil, which has almost doubled to $120 a barrel. Companies are struggling to pass on all of these higher costs to customers.

The retail data showed prices falling everywhere except for food stores. The Office for National Statistics reported that high street sales fell a seasonally adjusted 0.4% in March from February, slightly more than City expectations and the biggest fall since January last year.

The British Retail Consortium survey for March showed last week the first drop in shop sales in more than two years. Mortgage approvals also fell to a record low last month.

Indications were that sales in March would have been even weaker were it not for heavy discounting by shops. The "deflator" - a measure of inflation on the high street - showed prices were down 1.2% from a year earlier, the weakest reading this year. The only category to show a rise was food prices, which were up 2.3%, with all other categories showing a fall.

The ONS said the record price drop in electrical goods led to the only strong point of sales last month as shoppers bought computers, flat-screen TVs and iPods. The price cuts did not prevent sales of clothing and footwear dropping between February and March for the first time since December 1998.

Retail sales in the three months to March were 2% higher than the previous three months, the highest rate of growth since July 2006 as already strong growth in January and February was revised upwards. Economists acknowledged that sales had been strong in January and February but seemed to be running out of steam.

"Past strength will be no comfort to retailers in the months to come, and the direction of sales growth is worrying, given that consumer confidence has fallen to a 15-year low, wages growth is negative in real terms thanks to rises in food and energy prices, and house prices are also falling," said Rob Carnell, economist at ING Financial Markets.

The squeeze on costs for manufacturers has made it hard for them to pass on all of the price rises. The CBI reported that input costs were increasing at their steepest rate for 18 years, even as orders and output were showing signs of easing in a sector that has proved resilient to the economic turbulence thanks to a falling pound.

The price of goods leaving British factories is not keeping pace with rising raw material costs such as fuel and copper, which is up 20% over the past year. Nevertheless, manufacturers were raising prices at their fastest pace since 1995.

The CBI's industrial trends survey showed 50% of respondents reporting average unit costs had gone up in the past three months, and only 10% saw decreases. The 40-point gap is the biggest gap since July 1990. The 21-point gap between manufacturers who said they increased domestic prices and those who cut them is the widest since April 1995.

Export prices grew at a slower rate, with a balance of 12 points between those reporting rises and those seeing falls - a gap that was last topped in July 1995.